Dividend-paying companies distribute a portion of their earnings to shareholders on a quarterly or monthly basis. Dividend stocks are popular among investors because these regular payments can be reinvested or used as a source of steady passive income.
Furthermore, many dividend stocks that consistently pay dividends are well-established businesses that demonstrate stability and growth. Companies with high yields are particularly appealing to passive income investors. Let's take a look at two high-yielding passive income stocks you can buy right now.
AT&T: Dividend Yield of 5.6%
AT&T (T) has long been a top player in the telecommunications industry, known for its strong brand, extensive infrastructure, and historically generous dividend payouts. It provides a wide range of services, including wireless, broadband, and pay television. The company has also ventured into media and entertainment, most notably with the acquisition of Time Warner.
Valued at $142.7 billion, AT&T stock is up 19.4% year-to-date, compared to the S&P 500 Index’s ($SPX) gain of 17.6%.
AT&T's dividend yield, which has historically been among the highest in the telecommunications industry, has long been one of its most appealing features to investors. AT&T's annualized forward dividend yield is 5.6%, significantly higher than the communications sector average of 2.6%. While the high yield is certainly encouraging, the company has accumulated significant debt as a result of its aggressive expansion strategy, which includes the acquisition of Time Warner.
Its debt-to-equity ratio of 1.09 is relatively high. After paying off $2.2 billion in long-term debt, the company's net debt stood at $126.9 billion at the end of the second quarter. In the second quarter, AT&T generated $4.6 billion in free cash flow (FCF) and expects to generate $17 billion to $18 billion in 2024.
Despite AT&T's efforts to reduce its debt, investors remain concerned about its ability to sustain dividends. Increasing earnings and FCF generation should help the company pay down debts and continue to pay dividends. Its forward payout ratio of 48.7% indicates that dividends are currently sustainable, with the potential for dividend growth.
In the most recent second quarter, adjusted EPS (earnings per share) fell to $0.57, from $0.61 in the year-ago quarter. AT&T expects full-year adjusted EPS to arrive between $2.15 and $2.25. Analysts expect EPS within the same range for fiscal 2024, with earnings rising by 3.3% to $2.26 in 2025.
Overall, Wall Street rates AT&T stock as a “moderate buy.” Of the 24 analysts covering T, 11 have rated it a “strong buy,” one has a “moderate buy” recommendation, and 12 suggest a “hold.”
Based on its mean price target price of $21.56 from analysts, T stock has an upside potential of 6.7% from current levels. Plus, its high target price of $29 implies the stock could rally as much as 43.7% over the next 12 months.
Realty Income: Dividend Yield of 5.6%
Realty Income Corporation (O), commonly called "The Monthly Dividend Company," is known for its monthly dividend payments. It is a one-of-a-kind real estate investment trust (REIT) focused on free-standing, single-tenant commercial properties. Realty Income then leases them out to companies from a variety of industries. Its portfolio includes 15,450 properties in all 50 U.S. states, the United Kingdom, and Europe.
Valued at $54 billion, O stock has gained 7.6% YTD, compared to the broader market gain.
Known for its consistent and reliable dividend payments, Realty Income has become a favorite among income-focused investors. It operates under a triple-net long-term lease structure that has a weighted average lease term of 9.6 years. This structure provides Realty Income with a stable and predictable income stream.
Furthermore, being a REIT, the company is legally bound to pay 90% of its earnings as dividend payments. A REIT’s earnings are measured by its AFFO (adjusted funds from operations). For the quarter ended June 30, Realty’s AFFO increased 6% year-over-year to $1.06 per share.
The company hiked its monthly dividend by 1.6% to $0.777 for the quarter. By increasing dividends for 32 consecutive years, Realty Income is now a Dividend Aristocrat.
O pays an attractive forward dividend yield of 5.08%, higher than the real estate sector average of 4.46%. The forward FFO payout ratio of 74.03% is a little high, but can be sustainable if AFFO keeps growing. Analysts predict that Realty Income's FFO will increase by 3.78% in 2024 and 4.4% in 2025, respectively.
Overall, analysts have an average rating of “moderate buy” for O stock. Out of the 21 analysts covering the stock, seven have a “strong buy” rating, one has a “moderate buy” rating, and 13 have a “hold” rating.
The stock is trading close to its mean target price of $63.69, which represents an upside potential of about 3% from current levels. Plus, O's high target price of $70.25 implies that the stock could rise as high as 13.6% over the next 12 months.
